Monday, June 29, 2015

Back in the old days if you couldn't pay your bills you went bankrupt. The people who didn't do their due diligence and loaned you money would have to work it out in the courts. Today the Fed and the ECB have gone so far down the bailout rabbit hole that nobody is allowed to go bankrupt. This has probably been one of the reasons that the bull market has gone on so long and been so strong. When you know that the central banks will bail everybody out then you can take a ton of risk and not have to worry about the downside. But what happens when everyone takes a ton of risk for a long time? The eventual crash gets really ugly. Kind of reminds me of the mortgage crisis in 2008 and the tech bubble of 2000. The ECB can keep kicking the can down the road on Greece but the road eventually becomes a dead end and you have to deal with the fact that structurally, the Greek economy is different, and at the end of the day they probably just can't pay their bills. This has been going on now for a number of years and I am getting tired of it. Letting Greece go under would create some short term volatility but that would eventually subside and we could get on with business as usual. Investors would also be reminded that their is no such thing as risk free and that they still need to do their homework when decided what to invest in. Short term there would be some pain, longer term things would be better. Unfortunately, politicians think about the short term because of elections, and ignore the long term when they are likely to be out of office any way.

The idea is that a state issues bonds, borrowing money from bondholders, and invests the bonds in their depleted pensions. To make the math work the pensions invest the money relatively aggressively and are projecting that they will earn more on the invested money than they will pay out on the bond interest. If the next six years in the stock market look like the past six years then this will all end well. If they don't, then it could make a bad problem really bad. Kind of like what happens when you borrow from one credit card to pay off another credit card---usually things don't work out that well.

Nobody knows what the market is going to do, but we can learn a lot from history and at least judge the odds of this strategy being successful. Looking at current stock market valuations based on historical standards, whenever US markets have been at this high a valuation the next 10 years have been mediocre at best. One of the times when people start bringing out the this time is different argument they will be right, states better hope this time really is different.

About Me

Matthew Tuttle is CEO and CIO of Tuttle Tactical Management LLC. Matthew is the author of "How Harvard & Yale Beat the Market" and "Financial Secrets of my Wealthy Grandparents". He is frequently quoted in the media.

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